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Central Bank Digital Currency and Private Monies Central Bank Digital Currency and Private Monies Milan, May 10, 2018 [email protected] https://github.com/fametrano https://twitter.com/Ferdinando1970 https://speakerdeck.com/nando1970 https://www.reddit.com/user/Nando1970/ https://www.slideshare.net/Ferdinando1970 https://it.linkedin.com/in/ferdinandoametrano https://www.youtube.com/c/FerdinandoMAmetrano The Information Economy BANK • Data is transferred with zero marginal cost • Why pay a fee to move bytes representing wealth? • Why only 9-5, Monday-Friday, two days settlement? • Who (and when) will gift humanity with a global instantaneous free p2p payment network? 2/57 Reliable E-Cash Will Be Developed on the Internet The one thing that's missing, but that'll soon be developed, is a reliable e-cash, a method whereby on the internet you can transfer funds from A to B, without A knowing B or B knowing A, the way I can take a 20 Dollar bill and hand it over to you... Milton Friedman, 1999 https://www.youtube.com/watch?v=ZoaXLzFhWIw 3/57 Agenda 1. Central Bank and Private Digital Cash 2. About Money and Innovationa 3. Private Monies and Bitcoin 4. Hayek Money 4/57 Central Bank Digital Currency “[… it] is appealing […] it would mean people have direct access to the ultimate risk-free asset [...] it could exacerbate liquidity risk by lowering the frictions involved in running to central bank money [...] it could fundamentally and perhaps abruptly re- shape banking” Mark Carney, Governor of the Bank of England, June 2016 http://www.bankofengland.co.uk/publications/Documents/speeches/2016/speech914.pdf 5/57 Central Bank Digital Currency “Allowing the public to hold claims on the central bank might make their liquid assets safer, because a central bank cannot become insolvent. This is an feature which will become relevant especially in times of crisis – when there will be a strong incentive for money holders to switch bank deposits into the official digital currency simply at the push of a button. But what might be a boon for savers in search of safety might be a bane for banks, as this makes a bank run potentially even easier.” Jens Weidmann, President of Bundesbank, June 2017 https://www.ft.com/content/414072b7-0de5-3864-9493-14438eab30ae 6/57 Cash On The Ledger: Imperative for Delivery vs Payment • Hardly provided by Central Banks • IMF sponsored blockchain tokens might replace Special Drawing Rights: unrealistic as it would severely undermine US dollar predominance • absent from the agenda of prominent players promising DLT solutions • A free instantaneous P2P payment network is a great opportunity for retail banks (probably worth a consortium) 7/57 Cash or Electronic Money • Cash is a privacy preserving bearer asset • Electronic money is attributed to a given customer and can be recovered 8/57 Cash Digitization: Proof of Concept • Bitcoin core codebase • Mining, i.e. transaction finalization, reserved to vetted nodes (block signing from Elements) • Thousands transactions per second • Apps: wallets (iOS, Android, Desktop), blockexplorer, issuer dashboard 9/57 Cash Digitization: Security and Guarantees • Coin issuance backed by fiat currency reserves • Entrance/exit gateway (fiat currency <-> digital cash) monitored with KYC and AML processes • Issuer/admin able to confiscate coins to any address if needed/required 10/57 Cash Digitization: Regulators’ Feedback Transactions must be attributed to known customers -> Electronic money, not cash Alllowed applications must be certified, i.e. closed network -> Client-server approach, not peer-to-peer 11/57 Digital Currency Does Not Need Blockchain • Client-server solutions can be explored, e.g. SatisPay, even with bitcoin-like transactions • What is relevant is which reserve asset is backing the digital currency (if not issued by a central bank) • If customers are identified, then it is electronic money, not cash 12/57 Why is finance fascinated with blockchain? Blockchain transactions are immediately validated, then cleared and settled shortly thereafter, automatically without a central authority • In the financial world, cash transactions are cleared and settled automatically without a central authority 13/57 Consensus by Reconciliation • Non-cash financial transactions, e.g. stock trading, can be executed in nanoseconds, but are cleared and settled in days • Not a technological problem • Consensus by reconciliation of multiple independent ledgers: a checks and balances system that allows for prescriptions, corrections, and restrictions 14/57 Agenda 1. Central Bank and Private Digital Cash 2. About Money and Innovation 3. Private Monies and Bitcoin 4. Hayek Money 15/57 Trade Economy From Gold Standard to Fiat Money • Gold: the commodity money standard – scarce – pleasant color, i.e. resistant to corrosion and oxidation – high malleability – relative easiness of its purity assessment • Gold purity certification • Representative money • Fractional receipt money • Fiat money and legal tender 16/57 US Public Debt USD Purchasing Power 19/57 Take Money out of the Hands of Government I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop. F. A. Hayek https://youtu.be/EYhEDxFwFRU?t=19m23s 20/57 Friedrich August von Hayek Denationalisation of Money • history of coinage is an almost uninterrupted story of debasements; history is largely a history of inflation engineered by governments for their gain • why government monopoly of the provision of money is regarded as indispensable? It deprived public of the opportunity to discover and use a better reliable money Blessed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest A Free-Market Monetary System, Gold and Monetary Conference, New Orleans, Nov. 1977, https://mises.org/daily/3204 Hayek, F. A., Denationalisation of Money, The Institute of Economic Affairs, http://www.mises.org/books/denationalisation.pdf 21/57 Money As A Social Relation Instrument 1. Human beings are born into a gift economy 2. Enlarged relationship circle requires exchange economy 3. Barter economy: coincidence of wants 4. Trade economy: money as medium of exchange 5. Global information economy: supranational digital money 22/57 Permissionless Innovation Fast and Effective • No centralized security mechanism, no barrier to enter, no editorial control – Email has not been designed by a consortium of postal agencies – Internet has not been developed by a consortium of telcos • Will a decentralized transactional network be designed by a consortium of banks? 23/57 Agenda 1. Central Bank and Private Digital Cash 2. About Money and innovation 3. Private Monies and Bitcoin 4. Hayek Money 24/57 Private Monies • A medium of exchange issued by a non-governmental body, without legal privileges • Private monies do not have to be generally acceptable; they merely have to be accepted in a given economic community • Public demand for private currencies: – hold them in the expectation that they will not diminish in purchasing power as state money has – wish to be part of a movement against increasing state control of economic and personal behavior – conduct illegal activity – just want better money 25/57 Double Spending Problem • To securely transfer value using digital means has been possible for decades • In digital cash schemes, a single digital token, being just a file that can be duplicated, can be spent twice • A centralized trusted party has always been required to prevent double spending 26/57 Liberty Dollar: 1998-2009 • Private mint that issued gold and silver coins; also issued notes redeemable in precious metals • Periodically revalued against USD: the value of the latter fell over time against precious metals • Specifically designed to function in parallel with and in competition to USD • Never marketed or represented as official US currency • Highly successful: it became the second most popular currency in the US • Its use declared a federal crime by the US government • Its founders convicted for counterfeiting, fraud and conspiracy against the United States 27/57 E-gold: 1996-2007 • Digital payment system with gold as unit of account • User accounts backed by gold reserves • By 2005, e-gold had grown to be second only to PayPal in the online payments industry: 1.2M accounts and $1.5B transactions • Indicted in April 2007 by US law enforcement services • Charges: unlicensed money-transmitting entity and a means of moving the proceeds of illegal activities • Never proven and even the judge expressed major doubts • ‘Offshore’ payment system rather than a money transmitter or bank as defined under then-existing regulations, not least because gold was not legally ‘money’ 28/57 Distributed Consensus • Without a central trusted party, how does the Bitcoin protocol reach consensus on transaction history? • Consensus in an asynchronous network with faulty (or malicious) nodes is proved to be impossible • A problem known as Byzantine General Problem 29/57 Mining • All network nodes validate all transactions; those also providing the computational power for clearing and settlement are called miners • Miners compete to finalize a new block of transactions: the winner providing proof-of-work is rewarded with the issue of new bitcoins in a special coinbase transaction included in the block • Miners solve the double spending problem: – double spending (or invalid) transactions would invalidate the block – an invalid block would be rejected from the network – the bitcoin reward would be removed from transaction history – miner would have wasted his work 30/57 Bitcoin Distributed Consensus • Practical Byzantine Fault Tolerant (PBFT) distributed consensus is achieved using (game theory) economic incentive for the mining nodes to be honest. • Double spending is solved without a central trusted party • Bitcoin can resist attacks of malicious agents, as long as they do not control network majority • Miners are compensated for their proof-of-work using seigniorage revenues, i.e.
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